Africa’s red metal hotspot Zambia could soon be joining the global score board of rate hikes as inflationary pressures persist. The central bank on February 01 issued a circular prescribing a 250 basis point statutory reserve ratio for both foreign and local currency to 11.5%. This is the first hike since December 2019 when the ratio was widened 400 bps to reign in on currency slide induced price pressures. The copper currency has been on a steep 83 day losing streak starting September 2022 to date whose effects are breeding price pressures in various sectors of the economy.
This is the second lengthiest losing streak of the Kwacha on record, only second to the 200 day losing streak of 2020 to 2021. This has also resulted in the erasing of all the “confidence based” foreign exchange gains, since President Hichilema ascended to office.
MARKET FATIGUED WITH DELAYED DEBT RESTRUCTURE
In the labyrinth of a debt restructure whose delay continues to breed uncertainty and market fatigue, seasonal agriculture demand and asset sell off pressure have been key drivers of the risk – off mood in the Southern African nation. The Bank of Zambia made the decision a fortnight to the debut rate decision meeting of the year whose deliberations commence on 13 to 14 February at which, not until the statutory reserve hike, pointed to a potential benchmark interest rate hike.
Zambia has kept its monetary policy rate at 9% for 1 year with the last being in November 2021. Supporting this stance was the need to support growth post pandemic while inflation was fairly muted. Alongside this the central bank also cited financial frigility as a reason to opt for FX management as the inflation fighting tool in the February 2022 meeting instead of interest rate hikes.
As a result, the Zambian Kwacha was on a sprint as sentiment post the 2021 elections clawed back into the market spurred by private sector nodded political shift. With significant political will to restore fiscal fitness, the Zambian authorities negotiated an extended credit facility with the International Monetary Fund approved on September 30 of 2022 and was precursor to debt restructure. However, the delayed completion of the restructure process has fueled market weariness that has seen the copper currency reverse most of its sentiment induced gains breeding price pressures for which the central bank seeks to tame.
“The odds of a rate hike have widened but not likely in the February monetary decision meeting as the statutory reserve adjustment will be prescription enough for now to address a sliding currency,” ZATU Financial Consultants Managing Partner, Munyumba Mutwale, said in a note to clients. A 250 bps adjustment will mop significant market liquidity and is likely to push the yield curve higher to widen term funding costs, he said.
The Bank of Zambia joins the US Federal Reserve Bank, Bank of Canada, European Central Bank, Bank of Thailand, Bank of England, South African Reserve Bank, Bank of Tunisia and Bank of Sierra Leone in monetary tightening over the last two weeks as they seek to reign in on inflation.
The Kwacha Arbitrageur
